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Mired in mortgage mess: Stricter credit rules are making it harder for both buyers and sellers NewsdayMay 11, 2007 By LAURA KOSS-FEDER Tom Fortunato, 67, says he wishes that the housing market could be put into a time capsule and sent back a couple of years. Fortunato, whose six-bedroom, mother-daughter house in Nesconset is on the market for $599,000, had a sale fall through last year because the buyers, who have a poor credit score, could not get a loan. It had just started to become more difficult to obtain mortgages.And because home sales have slowed, the would-be buyers were unable to sell their Queens home and come up with enough cash as a backup plan to getting the mortgage. Fortunato was suffering the effects of a market where lenders on Long Island and across the nation are cutting back on all types of mortgages. This is because many companies made loans to weak, or subprime, borrowers during the past few years of the booming housing market. These borrowers - many with adjustable-rate mortgages and less-than-stellar credit - ultimately couldn't pay their debt and have gone into foreclosure. "This was very frustrating, since I thought this was a done deal," says Fortunato, a retired sales manager for Gerber Products Co. "You really need to know who your buyer is and what kind of credit background they have in today's market." Sellers like Fortunato are feeling the pinch as lenders pull back from handing out mortgages to buyers as easily as in the past. They are demanding better credit scores and proof of income and assets, particularly for those looking for larger amounts of financing. In fact, since the beginning of this year, those seeking 100 percent financing need credit scores of at least 680 out of a possible 850 and full documentation of their income and assets, says Bob Moulton, president of Manhasset-based Americana Mortgage Group, a mortgage brokerage. The minimum credit score for 100 percent financing used to be 660. Across the state, the number of lending institutions offering 100 percent financing has shrunk from about 30 to six, says Gregory Krauza, Buffalo-based president of the New York Association of Mortgage Brokers, which represents mortgage brokers throughout the state. And for those who are offering full financing, borrowers will pay a 1 percent higher interest rate as a premium. Fallout from lending fever "Over the past few years, people became swept up in the emotion and excitement of owning real estate and got approved for loans that they really couldn't afford," says Dean Hartman, chief planning officer at Melville-based Continental Home Loans Inc., a mortgage banker. "Now, we're seeing the fallout in the mortgage market." Moulton recalls a recent case of a couple in their 20s who were renting an apartment in Bayside and wanted to buy a house in Syosset. The husband's poor credit score resulted in their not being able to obtain 95 percent financing. After meeting with a credit repair consulting agency, paying off some bills and closing some open lines of credit, the couple were able to secure a mortgage and are closing this month on a residence in Syosset. "Had this been well over a year ago, they probably would have easily obtained the financing," Moulton says. Understanding that the market had changed, Christopher Daly, 35, an occupational therapist moving from Brooklyn Heights to Sag Harbor in June, did his research and gathered a host of documents in preparation for getting a mortgage. His mortgage broker even spoke with his wife's accountant to verify her income, since she is a self-employed psychotherapist. Shopping around Daly and his wife, Stephanie Despins-Daly, 36, who is expecting their second child in June, will be moving with their 3-year-old daughter Madeleine into their $1.1 million, four-bedroom Victorian house after obtaining 80 percent financing. They obtained a competitive 6.25 percent interest rate. "You need to do your homework to shop around and get the best interest rate and make sure you have all your paperwork in order for the lenders," Daly says. "They will look at everything." If you're looking for a mortgage - regardless of the amount and whether you have good or poor credit - obtain a pre-approval from the lender, Moulton says. This will give you a greater guarantee of a deal going through in today's market, he explains. Strong documentation The documents you will need to gather to show to the potential lender include one month of pay stubs, two years of tax returns and three months of asset statements - all the standard these days, Moulton adds. This was not the case just two to three years ago, when some mortgages were being handed out without income verification. Because obtaining financing is more challenging these days, the process can be made easier by knowing before applying for a mortgage exactly how you rate on the credit scale, real estate sources point out. Find out what your credit score is, and examine what is on your credit report, since there may be errors, says Steve Lefkowitz, loan officer with Preferred Empire Mortgage Co. in Melville. If your credit is poor, however, seek help from a credit counseling agency, Moulton advises. Try to pay off any debts you can. Know your credit score Once you know your credit score, decide what you really can afford. This is especially important these days for those home buyers with solid credit. "Lenders will look more kindly upon those borrowers with good credit," Hartman says. "But just because you can get a mortgage for a certain amount of money doesn't always mean that is the best thing for you to do in the long run." Ideally, a mortgage should take no more than one-third of a household's income. You need to take expenses and your lifestyle into account to make sure you are applying for a loan you can truly afford, Hartman adds. He stresses the importance of this, since a few years ago, many people got caught up in the house-buying frenzy. Sometimes, that led to buyers' taking on crushing mortgages that resulted in foreclosures. "There's more than just the house to pay for. You have the kids' soccer league and baseball games and dinners out. Don't forget to add in these items to your monthly expenses," he says. Steven and Sabrina Noftell, who have an infant daughter, Anjali, studied their budget when they went shopping for a home and mortgage. With tax returns and pay stubs in hand, and good credit, the couple were able to move in March from Commack to Medford with 100 percent financing for their three-bedroom, $290,000 house. Steven, 28, a store manager at Michael's in Rocky Point, says developing a good relationship with his mortgage banker, who told him what kind of supporting documents he would need, eased the process of getting a mortgage. "We felt like we were working as a team, and that made everything so much better and less intimidating," he says. "We also took our expenses into account and made sure that we were buying a house we can afford so that we don't get into any problems down the road." Today's sellers also need to be as careful as buyers like the Noftells, Moulton says. To avoid having a possible sale fall through, he says, sellers should ask buyers for a pre-approval - which shows they have applied for a mortgage and been approved - rather than a less binding pre-qualification. Accurate pricing important Sellers also should make sure their home has been accurately priced based on an appraisal. For example, if the buyer is putting only a small amount of money down on the home - say, 5 percent - and the appraisal comes in below the asking price, the buyer will not be able to get a mortgage, and there will be no deal. And, ultimately, the best offer made may not necessarily be the one you should grab. "While price is always a main concern, going with the highest offer doesn't necessarily mean you will have a sale," Moulton says. "You want to make sure your buyer can get that mortgage, especially in today's lending market." For buyers and sellers Find out what kind of mortgage you qualify for and can afford before you go house hunting. If your credit score is not up to par, consider applying for less money and try to put more money down. This will make it easier for you to obtain a mortgage. Consider having a family member serve as a co-signer to a mortgage, particularly if you are a first-time home buyer. With mortgages now more difficult to get, some lenders may ask for a co-signer. Understand the parameters of your mortgage. This is particularly true with some mortgages still being offered that can start off with a very low interest rate and balloon in later years. If you already have a good relationship with a bank or other lender, consider approaching that institution first for a mortgage. This is especially relevant today, since lenders are more heavily scrutinizing borrowers. Having a history with a bank may help your case, but then shop around as well. If you are a seller, ask for a mortgage pre-approval from any buyer who makes a serious offer. Consider the income and credit background of a potential buyer, not just that person's offer. Just because someone makes you a higher offer doesn't mean he or she can necessarily get the appropriate mortgage.
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